International Emissions Trading Research Articles

The EU Decarbonisation Roadmap 2050—What way to walk?

We carry out a detailed computable general equilibrium (CGE) analysis of the EU Decarbonisation Roadmap 2050 on a macroeconomic and on a sectoral level. Herein, we study a Reference scenario that implements existing EU policies as well as 3 unilateral and 3 global climate action scenarios. We identify global climate action with international emissions trading and the full equalisation of CO2 prices across all (EU) sectors as an economically reasonable policy option to avoid additional costs of the Decarbonisation Roadmap to a large extent. This policy option may include CDM (Clean Development Mechanism in the sense of ‘where’-flexibility) in an extended form if there are countries without emissions caps. Moreover, we identify diverse sectoral effects in terms of output, investment, emissions and international competitiveness. We conclude that the successful realisation of the EU Decarbonisation Roadmap probably requires a wise and joint consideration of technology, policy design and sectoral aspects.

The Economic Comparisons and Introduction to China of the Kyoto Mechanisms

The Kyoto mechanisms are important cost-effective ways of CO2 reduction for Annex I countries in the Kyoto Protocol. This paper makes a comparison among international emission trading (IET), joint implementation (JI) and clean development mechanism (CDM) on development potentials and economic efficiencies; builds a state-space decision model for the government to encourage enterprises to invest more in project-based mitigation; then presents the pareto optimality conditions. Some conclusions and suggestions for the introduction to China of Kyoto mechanisms are provided finally.

Do technology externalities justify restrictions on emission permit trading?

International emission trading is an important flexibility mechanism, but its use has been often restricted on the ground that access to international carbon credits can undermine the domestic abatement effort reducing the incentive to innovate and, eventually, lowering the pace of climate policy-induced technological change. This paper examines the economics that is behind these concerns by studying how a cap to the trade of carbon offsets influences innovation, technological change, and welfare. By using a standard game of abatement and R&D, we investigate the main mechanisms that shape these relationships. We also use a numerical integrated assessment model that features environmental and technology externalities to quantify how limits to the volume, the timing, and the regional allocation of carbon offsets affect climate policy costs and the incentive to invest in innovation and low-carbon technologies.Results indicate that, for moderate caps on the amount tradable emissions permits and sufficiently high technology spillovers, global innovation and technical change would increase and that this additional innovative effort could lead to economic efficiency gains. The numerical analysis confirms that when constraints are close to 15% of domestic abatement, efficiency losses are small because they are partly compensated by more technological spillovers and lower energy prices. Under a broad range of parameters, restrictions are costly for the constrained countries, but always beneficial for unconstrained ones.

Optimal strategic regulations in international emissions trading under imperfect competition

This paper analyzes governments’ strategic regulations in an imperfectly competitive market of international emissions trading (IET). Whether and how governments intervene in IET is explored. If regulations are decided, it is optimal for price-influencing countries to subsidize but for price-taking countries to tax permit trading. Conducting simulations of the Annex-1 emissions trading, we discover that no-intervention of all countries cannot be supported by any equilibrium. In contrast, all or some countries would regulate at equilibrium. In the latter case, price-influencing countries would not regulate but price-taking countries would. This justifies the necessity of considering no-intervention as a policy choice, and shows that a country’s decisions about strategically regulating IET may be affected by other countries’ intervention resolutions.

IS EMISSION TRADING BENEFICIAL?*

We develop a two-country (North and South), two-good, general equilibrium model of international trade in goods and explore the effects of domestic and international emission trading under free trade in goods. Whereas domestic emission trading in the North may result in carbon leakage by expanding the South's production of the emission-intensive good, international emission trading may induce the North to expand the production of the emission-intensive good by importing emission permits. Emission trading may deteriorate the global environment. The North's (South's) emission trading may not benefit the South (North). International emission trading improves global efficiency but may not benefit both countries.

Permit Trading: Merely an Efficiency‐Neutral Redistribution away from Climate‐Change Victims?*

AbstractIn this paper, we present a climate‐policy game with international emissions trading, where governments first select their amounts of emissions permits. These permits are transferred to firms, and then traded competitively on an international market. Compared with a game without trading, we find that the potential efficiency gains from permit trading, which have been identified in other studies, are totally undone if governments also employ a tax or subsidy on domestic emissions. The only effect of permit trading in this case is a redistribution of income away from those most affected by climate change.

Emission Trading as a Tool for Environmental Management

Although there is continuing progress in the use of ET for environmental management, there is no clear direction that one can establish in terms of its future. Directional change occurs as different models are implemented and evaluated under changing technological and cultural circumstances. If the emphasis will be on international emission trading or CDM, a thorough review of past Joint Implementation efforts should be undertaken. There is no doubt that lessons gained can shape up the trading system. If the focus is to be on domestic trading of selected emissions, then capacity building and further pilot trading should be pursued. The promotion of ET for environmental management is consistent with the broad development strategies adopted by many developing countries in protecting the environment. It is important that the governments provide policy support through studies that assess experiences in ET and identify the positive and negative aspects of implementation, and assist in capacity building in terms of training programs, human resource development, and institutional strengthening. It is also important to promote regional cooperation by exploring potential for CDM and related activities of various international protocols. DOI: http://dx.doi.org/10.4038/sjae.v3i0.3491 SJAE 2000; 3(1): 71-92

Carbon accounting and the climate politics of forestry

Many proposals have been made for the more successful inclusion of LULUCF (Land Use, Land Use Change and Forestry) in the Kyoto framework. Though the positions of individual states or the goal of avoided deforestation guide many approaches, our model sets cost-effective strategies for climate change mitigation and the efficient and balanced use of forest resources at its center. Current approaches to forest resource-based carbon accounting consider only a fraction of its potential and fail to adequately mobilize the LULUCF sector for the successful stabilization of atmospheric greenhouse gas (GHG) concentrations. The presence of a significantly large incentive gap justifies the urgency of reforming the current LULUCF carbon accounting framework. In addition to significantly broadening the scope of carbon pools accounted under LULUCF, we recommend paying far greater attention to the troika of competing but potentially compatible interests surrounding the promotion of standing forests (in particular for the purposes of carbon sequestration, biodiversity protection and ecosystem promotion/preservation), harvested wood products (HWP) and bioenergy use. The successful balancing of competing interests, the enhancement of efficiency and effectiveness and the balanced use of forest resources require an accounting mechanism that weighs and rewards each component according to its real climate mitigation potential. Further, our data suggest the benefits of such a broadly based carbon accounting strategy and the inclusion of LULUCF in national and international accounting and emission trading mechanisms far outweigh potential disadvantages. Political arguments suggesting countries could take advantage of LULUCF accounting to reduce their commitments are not supported by the evidence we present. (C) 2011 Elsevier Ltd. All rights reserved.

Extending the Sectoral Coverage of an International Emission Trading Scheme

In a model inspired by the EU Emissions Trading Scheme, non-cooperative countries allocate their emissions to internationally trading and non-trading sectors. Each country is better off with trading than without, and aggregate welfare is maximized with all sectors in the trading scheme. We analyze the effects of extending the sectoral coverage of the trading scheme in a two-country model with quadratic abatement costs. If only the original trading sector is asymmetric between countries, the welfare change is always positive and the same in both countries. If the original and additional trading sectors are asymmetric, one country might lose, but there is an aggregate welfare gain. If the original trading sector and the non-trading sector are asymmetric, both countries always gain.

Endogenous market structures in non-cooperative international emissions trading

The literature on cost-effective international emissions trading (IET) assumes exogenous market structures. This paper develops a game-theoretical model along with numerical simulations for the world economy in order to analyze the equilibrium market structures of an IET scheme. Countries’ decisions regarding the exercise of market power and their initial permit endowments are made non-cooperatively, being guided by their national self-interest. The theoretical results show that both price-influencing and price-taking countries choose an optimal permit endowment in light of their damage costs. Low-damage (high-damage) countries choose more emission permits and act as permit sellers (buyers). The numerical results further suggest that an imperfectly competitive IET market with all price-influencing countries being permit buyers (sellers) has lower (higher) emissions than a perfectly competitive IET market. Finally, the IET scheme has an equilibrium market structure of imperfect competition where the high-damage European Union acts as a unique price maker. This equilibrium imperfectly competitive IET has the lowest global emissions.

Prospects for Meeting Australia’s 2020 Carbon Targets, given a Growing Economy, Uncertain International Carbon Markets and the Slow Emergence of Renewable Energies

The carbon emissions of Australia’s future energy consumption are compared with the emissions targets implied by the cuts in carbon emissions committed to by the Australian government for 2020 and 2050. Analysis shows that even the seemingly modest cut of 5% of carbon emissions by 2020 cannot be met without substantial contributions by low carbon sources that are in addition to the contribution of 20% of electricity supply mandated by the government. The choices in renewable energy are constrained by the need for base-load power to constitute a large proportion of energy supply but the short lead time to 2020 precludes sources that require more development or lengthy planning processes. The official forecasts of energy generation assume a large proportion of Australia’s emissions will be offset through international emission trading. However the prospects for the development of international carbon market are presently poor. The conclusion is that, even with a domestic price on carbon, the Australian government’s 2020 targets for carbon emission reductions are unlikely to be met and should be revised downwards.

Economic Growth and a Low Carbon Economy―Does the Earth Suffer from an “Easter Island Syndrome”?

The history of the Eastern Islands in the Pacific with an increasing over-utilization of natural resources reminds us of the mistakes modern societies are making and the question is obvious whether the Earth is suffering from an Eastern Islands Syndrome, in other words whether the egoism inherent in humans long-term might have fatal consequences for our species homo sapiens. Climate research identified two important phenomena, which should remind us of the Easter Islands: feedbacks and tipping points, i.e. self-accelerating phenomena of global warming and reaching irreversible points of climate change. Only a quick worldwide return to a low carbon economy is able to stabilize global warming on a bearable level. Both, Annex-I countries and Non-Annex-I countries have to contribute to reaching this goal taking their historical, current and future responsibilities into account. A post Kyoto regime based on cumulative per-capita CO2-emission rights and a international emission trading could provide for incentives to achieve a low carbon economy, especially for newly industrialized countries.

International Emissions Trading: A Survey of Phases of the European Union Emissions Trading Scheme

This paper provides a review of pertinent trading, regulatory and policy issues in the EU-ETS since 2005. We review the first two phases of the scheme and speculate on auctioning related issues in the third phase. Our report documents a number of variables contributing to inefficiencies in Phase I and significant general market improvements in Phase II. This review suggests that the prospects for continued global action on climate change after Durban COP 2011 rests on the continued success of the EU-ETS.

Politics and Economics of Second-Best Regulation of Greenhouse Gases: The Importance of Regulatory Credibility

Compared with economically ideal policies, actual limits on global warming gases are likely to be “second-best” in many ways. Most studies focus on “second-best” approaches such as delaying emission controls in developing countries, constraining international emission trading, or regulating gases piecemeal by sector rather than equally across the whole economy. We show that another second-best approach—lacking of regulatory credibility—imposes up to six times the extra costs on the economy when compared with all other “second-best” factors combined. When regulatory rules are not believable then firms and other agents become short-sighted and unable to make optimal investments in research and development as well as long-lived technologies. Although analysts have largely ignored this issue, low credibility is commonplace when governments tackle international problems because international institutions such as treaties are usually weak and fickle. Governments can help solve credibility problems with strategies such as “pre-committing” regulations into domestic law that is usually more credible than international commitments. We show that China, for example, can justify unilateral, emission controls because such pre-commitment would encourage Chinese firms to invest with a clearer eye to the future.

A Study on GHG Abatement Costs in Korea: International Emissions Trading and Major Sectors of Carbon Reduction

In this paper, we estimate the cost of the GHG abatement target by Korean government using a trade-based model, GTAP-E, after updating all the database of industrial and trade structures as well as carbon dioxide emissions of most of regions of the world. Major findings of this paper are as follows. First, estimates of the costs, GDP and welfare costs as well as abatement cost, of the GHG abatement target differ substantially by two things: (1) assumption on carbon reductions in other countries (the reduction only in Korea or commitments with Annex I countries), (2) assumption on international emission trading. Second, governmental policy to set sectoral abatement target would increase the costs than otherwise in spite of the same level of the carbon reduction. But in the case of mild adjustments of sectoral targets by the government, the policy with more reductions in industrial sectors than private consumptions are absolutely better than the other (reducing more in private consumptions).

The impact of uncertain emission trading markets on interactive resource planning processes and international emission trading experiments

Interactive resource planning is an increasingly important aspect of emission trading markets. The conferences of Rio de Janeiro, 1992, and Kyoto, 1997, originally focusing on environmental protection at both macro- and micro-economic levels, called for new economic instruments of this kind. An important economic tool in this area is Joint Implementation (JI), defined in Article 6 of the Kyoto Protocol. Sustainable development can be guaranteed only if JI is embedded in optimal energy management. In this contribution we describe and evaluate one international procedure within uncertain markets which helps to establish optimal energy management and interactive resource planning processes within uncertain emission trading markets.

Distributed Generation to Reduce Carbon Dioxide Emissions: A Case Study for Residential Sector in Oman~!2009-11-03~!2010-03-13~!2010-06-09~!

The paper presents a case study in Oman to reduce the CO2 emission by diesel-photovoltaic based distributed power system feeding to a house located in remote area. Model of a hybrid power system comprising of a photovoltaic module, along with a diesel generator and essential auxiliary devices is proposed. The actual average solar radiation and residential load data, collected from the meteorological department and local utility office are used in this case study. The simulation results carried out using HOMER software indicate that the proposed hybrid system is attractive to reduce CO2 emission by 38% when compared to the diesel system alone, and by 2.67 % compared to the main interconnected system. The study also includes operational and per unit energy cost estimates. It is seen that the diesel-photovoltaic hybrid system is attractive in terms of operational costs, which is lower by 29.44% compared to the diesel system; while per unit energy cost is 12.08% lower. It may be noted that the cost estimates arrived at for main interconnected system are better in terms of per unit energy cost, which is lower by 8.43 % compared to the proposed hybrid system, while it is not attractive in terms of CO2 emissions. The Kyoto Protocol provides various mechanisms like joint implementation, clean development mechanism and international emission trading that enable countries to acquire GHG reduction credits. The evaluation and deployment of carbon credit is a key component to mitigate the growth in concentration of GHG. Prabhakant and Tiwari (2) have carried out an analysis to determine the carbon credits earned using standalone solar PV system which is encouraging and cost effective than conventional power generation. The other viable option to curb the carbon emission is substantial use of renewable energy along with the conventional resources. The paper presents a case study to reduce the GHG by proposing a Diesel-Photovoltaic Hybrid System (D-PVHS) feeding to a house located in remote area. The reminder of this paper is organised as follows. Second section presents the historical data of CO2 emission and daily residential power demand. Section III estimates the emission factor and energy cost of Main Interconnected System (MIS) feeding to the residential sector. Section IV describes the potential of renewable energy in the Oman. The model development is described in Section V. The application of this case study is explained in section VI. Results and discussion are described in section VII while conclusions of the study are presented in section VIII.

Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries

In the debate on post-Kyoto global climate policy, intensity targets, which set a maximum amount of emissions per GDP, figure as prominent alternative to Kyoto-style absolute emission targets, especially for developing countries. This paper re-examines the case for intensity targets by critically assessing several of its properties, namely (i) reduction of cost-uncertainty, (ii) reduction of ‘hot air’, (iii) compatibility with international emissions trading, (iv) incentive to decouple carbon emissions and economic output (decarbonization), and, (v) use as a substitute for banking/borrowing. Relying on simple analytical models, it is shown that the effect on cost-uncertainty is ambiguous and depends on parameter values, and that the same holds for the risk of ‘hot air’; that the intensity target distorts international emissions trading; that despite potential asymmetries in the choice of abatement technology between absolute and intensity target, the incentive for a lasting transformation of the energy system is not necessarily stronger under the latter; and, finally, that only a well-working intensity target could substitute banking/borrowing to some extent—but also vice versa. Overall, the results suggest that due to the increased complexity and the potentially only modest benefits of an intensity target, absolute targets remain a robust choice for a cautious policy maker.

Strategic issues in global climate change policy*

An analysis of prospects for deriving self‐enforcing, global, greenhouse gas emission mitigation agreements is provided. Policy spillovers and carbon leakages are accounted for. Situations where mitigation effort should be concentrated in particular countries and where efficient outcomes can be fostered by international trade in emissions permits are discussed. The use of auxiliary policies to transform intractable Prisoner’s Dilemma incentive problems to more tractable problems, the role of policy commitments and the strategic implications of ‘no regret’ and ‘adaptation’ policies are analysed. Dynamic and repeated game formulations are outlined.

Reducing emissions in New Zealand: after Copenhagen

The outcomes from Copenhagen were less definite than many hoped. The major disappointment was in not achieving an internationally agreed CO2 reduction target, and everything else flowed from that, including not much progress towards international emissions trading.